July 24 - Bloomberg (Allen Wan and Catarina Saraiva): "The world's two biggest
initial public offerings this year are from China and Brazil, reflecting the
'growing power' of the so-called BRIC nations, said Barton Biggs.. China State
Construction Engineering Corp... yesterday raised 16 billion yuan ($7.3 billion)..
The Brazilian affiliate of Visa Inc., known as VisaNet, took in 8.4 billion
reais ($4.3 billion) in its Sao Paulo offering in June. 'No question, it shows
the growing power of the BRICs,' Barton Biggs..said.. 'Clearly the BRICs are
the big growth areas of the world and will need a lot of foreign capital.'"

Federal Reserve Credit dipped $1.1bn last week to $2.011 TN. Fed Credit has
declined $236bn y-t-d, although it expanded $1.128 TN over the past 52 weeks
(128%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past
week (ended 7/22) rose $4.8bn to a record $2.787 TN. "Custody holdings" have
been expanding at a 19.3% rate y-t-d, and were up $433bn over the past year,
or 18.4%.

Total Commercial Paper outstanding declined $3.4bn to $1.093 TN. CP has declined
$588bn y-t-d (63% annualized) and $651bn over the past year (37%). Asset-backed
CP decreased $4.5bn to $437bn, with a 52-wk drop of $313bn (42%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $30bn y-o-y to a record $7.017 TN. Reserves have now increased
$253bn year-to-date.

Global Credit Market Watch:

July 24 - Bloomberg (Bryan Keogh, Morwenna Coniam and Abigail Moses): "Corporate
credit in the U.S. and Europe rallied this week to levels last seen more than
a year ago.."

July 22 - Bloomberg (Robert Schmidt): "Most investors are shaking off the
world economic crisis and many are willing to take on more risk as they hunt
for opportunities, especially in China and India, according to a survey by
Bloomberg.."

Government Finance Bubble Watch:

July 20 - Bloomberg (Dawn Kopecki and Catherine Dodge): "U.S. taxpayers may
be on the hook for as much as $23.7 trillion to bolster the economy and bail
out financial companies, said Neil Barofsky, special inspector general for
the Treasury's Troubled Asset Relief Program. The Treasury's $700 billion bank-investment
program represents a fraction of all federal support to resuscitate the U.S.
financial system, including $6.8 trillion in aid offered by the Federal Reserve,
Barofsky said in a report.. Costs include $2.3 trillion in programs offered
by the Federal Deposit Insurance Corp., $7.4 trillion in TARP and other aid
from the Treasury and $7.2 trillion in federal money for Fannie Mae, Freddie
Mac, credit unions, Veterans Affairs and other federal programs, he said."

July 24 - Bloomberg (Dawn Kopecki): "Fannie Mae and Freddie Mac grew to the
point where they posed 'enormous risk' to the financial system, an error that
will shape how policy makers restructure the companies, Treasury Secretary
Timothy Geithner said. 'It would have been good had we figured out a way to
avoid that out earlier,' Geithner told the House Financial Services Committee..
'That mistake should underpin much of what we do in thinking about how to create
a more stable system.' ..The Obama administration has yet to figure out what
to do with Fannie Mae and Freddie Mac, which regulators seized in September..
Geithner reiterated that a restructuring is being put off until next year because
of the companies' size and as officials tackle other economic issues. 'We cannot
credibly think of that right now, because they are the entire mortgage market
in the country.. But that time will come and it will come relatively quickly.'"

July 21 - Bloomberg (Gonzalo Vina): "Britain had a 13 billion-pound ($21.4
billion) budget deficit in June, the most for the month since records began
in 1993.."

July 23 - Bloomberg (Paul Abelsky): "Russia will transfer 1.36 trillion rubles
($43.7 billion) from the Reserve Fund, one of its two sovereign wealth funds,
in the third quarter as the government tries to plug its first budget shortfall
in a decade."

July 21 - Financial Times (David Oakley, Ralph Atkins and Gillian Tett): "Central
banks have pumped a vast amount of money into the financial system this year
- but so far there is little evidence that this liquidity has found its way
into the broader economy. What is happening could be likened to the pattern
that develops when a household drain is partly blocked as the central banks
frantically pour money into the financial system, with the commercial banks
supposedly acting as a pipe, in an effort to stabilise the economies. But many
commercial banks are reluctant to pass this liquidity on to their customers,
in the form of loans, because they are scrambling to repair their own balance
sheets and are afraid to lend because of fears of potential losses. The banking
pipe is, thus, partly blocked."

July 20 - Bloomberg (Agnes Lovasz): "Iceland will spend 270 billion kronur
($2.1 billion) to rebuild its banking system following the failure of the industry
last year. The government will issue bonds to the three new banks that emerged
from the collapse of its biggest lenders in October, the Finance Ministry said.."

Currency Watch:

July 21 - Financial Times (Jamil Anderlini): "Beijing will use its foreign
exchange reserves, the largest in the world, to support and accelerate overseas
expansion and acquisitions by Chinese companies, Wen Jiabao, the country's
premier, said.. 'We should hasten the implementation of our 'going out' strategy
and combine the utilisation of foreign exchange reserves with the 'going out'
of our enterprises," he told Chinese diplomats.. The 'going out' strategy is
a slogan for encouraging investment and acquisitions abroad, particularly by
big state-owned industrial groups.. Qu Hongbin, chief China economist at HSBC,
said: "This is the first time we have heard an official articulation of this
policy ... to directly support corporations to buy offshore assets.. This is
reserve diversification in a broader sense. Instead of accumulating foreign
exchange reserves and short-term financial assets, the government wants the
nation to accumulate more long-term corporate real assets.' ..In an interview
published in state-controlled media, the chairman of China Development Bank
said Chinese outbound investment would accelerate but should focus on resource-rich
developing economies. 'Everyone is saying we should go to the western markets
to scoop up [underpriced assets].. I think we should not go to America's Wall
Street, but should look more to places with natural and energy resources.'"

The dollar index declined 0.7% this week to 78.77. For the week on the upside,
the Swedish krona increased 4.6%, the South African rand 4.0%, the Canadian
dollar 2.7%, the Norwegian krone 2.5%, the Australian dollar 1.8%, the New
Zealand dollar 1.7%, the Brazilian real 1.6%, and the Euro 0.8%. On the downside,
the Japanese yen declined 0.6%.

Commodities Watch:

July 22 - Bloomberg: "China, the world's largest coal user, increased imports
of the fuel to a record last month after demand recovered and global prices
fell. Overseas coal purchases jumped to 16 million metric tons in June, a sixfold
increase from a year earlier.."

July 24 - Bloomberg (Sophie Leung): "China may overtake India to become the
world's top gold consumer this year, the World Gold Council said, as the nation
became the first of the major economies to rebound from the global recession."

July 22 - Bloomberg: "China, the world's largest steel producing nation, should
curtail 'reckless investments' in the industry by withholding project approvals.
China's demand for steel is about 500 million metric tons, less than the annual
output capacity of 660 million tons, Zhu Hongren, spokesman for the Ministry
of Industry & Information Technology, said.."

July 22 - China Knowledge: "The financial institutions in China extended a
total of RMB 466.18 billion in home mortgage loans in the first half of this
year, up 150% from the same period of last year.. In the first half, the home
mortgage loans issued by state-owned banks accounted for 71.79% of the country's
total.."

July 20 - Bloomberg: "New home prices in 36 medium- and large-sized Chinese
cities rose 6.3% in June from a year earlier as bank lending tripled in the
first half. The average price of new homes rose to 6,554 yuan ($959) per square
meter.."

July 22 - Bloomberg: "Chinese investors are rushing to buy into the world's
second best-performing stock market following the end of a ban on initial public
offerings and a rebound in economic growth. Individual investors opened 484,799
stock accounts last week.. the most since the five days ended Jan. 25, 2008,
and almost five times this year's low in January."

July 23 - Bloomberg (Bei Hu): "China State Construction Engineering Corp.
attracted more than 1.8 trillion yuan ($263.5 billion) of orders for the world's
largest initial public offering since March 2008.. The number represents about
36 times the maximum amount the company is seeking.."

Asia Bubble Watch:

July 24 - Financial Times (Christian Oliver and Tim Johnston): " South Korea
posted its strongest growth in five and a half years during the second quarter..
South Korea's economy grew 2.3% in the second quarter compared with the first..
echoing positive gross domestic product trends reported by China, Singapore,
Vietnam and Kazakhstan."

Latin America Watch:

July 21 - Bloomberg (Iuri Dantas): "Brazilian antitrust agency chief Arthur
Badin said a move by state-owned banks to cut interest rates in a bid to force
others to match lower borrowing costs threatens to hurt the banking industry.
Public banks fulfill an important role in helping the economy recover,' Badin
said.. 'It's also important that, under the pretext of increasing competition,
you don't achieve the opposite in the long term, with irrational pricing of
interest rates when there exists the possibility for effective competition.'"

July 20 - Bloomberg (Bill Faries): "Argentina will have a budget deficit this
year for the first time since 2002, increasing the risk of a default as tax
revenue lags behind spending increases, Morgan Stanley economist Daniel Volberg
wrote.."

Unbalanced Global Economy Watch:

July 22 - Bloomberg (Alexandre Deslongchamps): "Canadian retail sales rose
more than expected in May, posting the fourth gain in five months.."

July 23 - Bloomberg (Jennifer Ryan): "U.K. mortgage approvals rose in June
to the highest level since March 2008 as the property slump showed sign of
easing and banks became more willing to lend."

July 23 - Bloomberg (Svenja O'Donnell): "U.K. retail sales jumped four times
as much as economists forecast in June.. Sales climbed 1.2% from May.. From
a year earlier, sales rose 2.9%."

July 21 - Bloomberg (Steve Scherer): "Italian research institute Isae said
the nation's economy will contract 5.3% this year, twice as it previously forecast.."

July 23 - Bloomberg (Kim McLaughlin): "Sweden's unemployment rate rose for
a second month in June.. The non-seasonally adjusted jobless rate.. was 9.8%..."

Bursting Bubble Economy Watch:

July 23 - Wall Street Journal (Jon Hilsenrath and Deborah Solomon): "The
job market is doing even worse than the overall economy, prompting concern
inside and outside the government that deeper-than-expected joblessness could
persist once the recession ends. Breaking from historical patterns, the unemployment
rate -- currently at 9.5% is one to 1.5 percentage points higher than would
be expected under one economic rule of thumb, says Lawrence Summers.. Since
the recession began in December 2007, the economy has lost 6.5 million jobs,
4.7% of total employment. The unemployment rate has jumped five percentage
points, while the economy has contracted by roughly 2.5%."

July 21 - Bloomberg (Caroline Salas and Michael McKee): "For the first time
since Harry S. Truman was in the White House, Americans are paying back their
debts, a phenomenon that just might help keep interest rates low as the Treasury
sells a record $2 trillion of bonds and rising unemployment increases U.S.
savings. .. household borrowing fell to 128% of the average family's after-tax
income in the first quarter from a record 133% in the same period a year earlier.."

July 22 - Bloomberg (Gillian Wee): "Harvard University and Yale University
are preparing for an extended period of austerity as U.S. colleges are forced
to cut spending next year and beyond to offset the biggest investment losses
since 1974."

Central Banker Watch:

July 22 - Bloomberg (Mayumi Otsuma): "Bank of Japan Deputy Governor Hirohide
Yamaguchi said the central bank will end its unprecedented credit programs
in a way that is least disruptive to investors. 'The bank will, without any
predetermined view, carefully assess developments in corporate financing and
financial markets,' Yamaguchi said.. 'It is important to plan an exit in a
way that market participants can anticipate and not bring about unnecessary
market disturbances.'"

Real Estate Bust Watch:

July 22 - Bloomberg (Kathleen M. Howley): "Home prices fell 5.6% in May from
a year earlier as job losses and record foreclosures deterred buyers during
the spring selling season when the bulk of U.S. real estate sales typically
occur. The average price rose 0.9% from April, the Federal Housing Finance
Agency..said..."

July 22 - Los Angeles Times (W.J. Hennigan): "The slump in the hospitality
business.. has led to dramatic increases in the number of hotels that can't
pay their bills. About 250 hotels are in default or foreclosure in California,
according to..Atlas Hospitality Group.. With the trend expected to continue
throughout 2009, as many as 500 properties could be in default by year's end,
Atlas President Alan X. Reay said."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

July 21 - Bloomberg (Sarah Mulholland): "Standard & Poor's raised the
ratings on commercial mortgage-backed debt from three bonds sold in 2007, restoring
the top-ranked status of the securities. The debt had been cut as recently
as last week, rendering the securities ineligible for the Federal Reserve's
Term Asset- Backed Securities Loan Facility to jumpstart lending."

GSE Watch:

July 22 - Bloomberg (Jody Shenn): "Mortgage bonds guaranteed by U.S. agency
Ginnie Mae will probably swell to $1 trillion by the end of 2010 because borrowers
with low down payments or credit scores can only qualify for government-insured
loans, Bank of America Corp. analysts said. The Federal Housing Administration,
which insures loans with down payments as low as 3.5% and has no credit-score
requirements, is 'the only source of funding for these leveraged borrowers,'
Ankur Mehta and Ohmsatya Ravi..wrote.. Debt explicitly backed by the U.S. through
Ginnie Mae, formally known as the Government National Mortgage Association,
climbed to $680 billion as of June 30 from $360 billion two years earlier..
Lenders package those mortgages into bonds backed by Ginnie Mae."

New York Watch:

July 20 - Bloomberg (Michael Quint): "New York state tax collections were
$486.9 million less than projected for the three months ended June 30.. The
shortage was mostly in collections of personal income taxes.."

Muni Watch:

July 21 - Financial Times (Nicole Bullock): "Sharply falling tax revenues
across the US have left states facing fresh budget shortfalls and threatening
further painful spending and service cuts following previous multiple rounds
of belt-tightening. In the first quarter of the calendar year, tax collections
dropped by 11.7%, the largest fall on record, according to the Rockerfeller
Institute of Government. Of 50 states, some 45 reported declines."

Speculator Watch:

July 21 - Bloomberg (Michael B. Marois): "The California Public Employees'
Retirement System, the largest U.S. defined-benefit public pension, lost 23.4%
last year.. Assets totaled $183.7 billion.."

July 22 - Bloomberg (Tomoko Yamazaki): "Hedge funds had net inflows of $6.2
billion and returned an average 0.2% in June, rounding off a record three-month
rally, Eurekahedge Pte said."

July 21 - Financial Times (Sam Jones): "Hedge fund managers forecast that
a wave of investor cash would flow into the industry in coming months after
evidence of the best quarterly performance by many funds in a decade. Total
assets under management by the world's hedge funds rose more than $142bn in
the second quarter of 2009, reflecting the strong performance of the industry
as a whole, according.. to Hedge Fund Research. Outflows from clients slowed
to $42bn, from a peak of $152bn in the quarter following last September's collapse
of Lehman Brothers.. A leading hedge fund manager, who declined to be named,
said 'This is the best time for generating alpha in 10 years.'"

July 22 - Wall Street Journal (Gregory Zuckerman): "Hedge funds are enjoying
their best period in a decade. One reason: Wall Street firms are pulling back
from their own 'proprietary' trading, meaning less competition. For years,
hedge funds grumbled that their biggest rivals weren't other funds, but groups
within banks trading their firms' own cash. These proprietary trading desks,
usually focused on similar opportunities to hedgies, could use higher leverage
to make bets.. The prop traders were assigned to other trading desks and given
less cash to work with. That is making life easier for hedgies."

Tug-of-War:

I had limited time to write today. Rather than go with a "Just the Facts," I
leave you instead with brief comments.

Chairman Bernanke committed another mistake this week. Removing monetary
stimulus before inflation takes root was the focus of both his Wall Street
Journal op-ed piece and this week's congressional testimony. While I consider
inflation to be a risk, it is definitely not the dominant systemic risk in
play these days. Continuing its now traditional approach, the Federal Reserve
is content to disregard unfolding asset Bubble risk. Today's Bubble inflates
rapidly throughout government finance - more specifically the enormous Treasury,
agency debt and GSE MBS marketplace.

Actually, Dr. Bernanke did worse than ignore Bubble risk. The markets were
promised the Fed would maintain its current ultra-loose monetary policy stance
for an "extended period." This is the same type of policy commitment that fostered
speculative Bubbles in mortgages, housing, private-label MBS and CDOs. The
Fed today is determined to peg short rates and market yields. Sure, there are
obvious short-term reflationary benefits to such an approach. But such an endeavor
also nurtures speculation and leveraging, especially in the Bubbling Treasury,
agency and MBS markets. From my perspective, this is the most dangerous Bubble
yet. It is addressed by no one.

I do appreciate that the Bernanke Fed has spent considerable time contemplating
how to remove the past year's unprecedented monetization. In a normal environment
it would matter. But extraordinary circumstances would seem to completely rule
out the possibility of Federal Reserve tightening. The risk of bursting the
government finance Bubble is too great - and will become only greater. With
Treasury, agency and GSE MBS now accounting for the vast majority of system
Credit creation, economic and Credit system "recovery" would be stopped dead
in its tracks by a surprising jump in market yields. The Fed has, once again,
delegated itself to the role of Bubble enabler.

Tuesday, Bloomberg News went with the headline "Treasuries Rise as Bernanke
Sees Limited Inflation.." The Sydney Morning Herald captured the true underpinnings
of the Treasuries' big gain: "Bernanke to Keep Easy US Credit Policy." Dr.
Bernanke did a nice job showcasing his inflation-fighting toolkit, although
the markets really just needed reassurance he's not going to back away from
aggressive reflation anytime soon. And, here we are again, with Fed actions
becoming a significant factor shaping/distorting market perceptions - hence
the pricing and flow of finance throughout the economy. This becomes a critical
dynamic with respect to the unfolding "government finance Bubble" because this
Credit dynamic is capital markets driven (market perceptions of returns on
securities dictating Credit expansion).

With U.S. inflation well in check, a strong bullish consensus sees prolonged
loose monetary policymaking ensuring low and stable bond yields indefinitely.
There is today a tremendous amount riding on this market view. At the same
time, it is difficult to envisage a financial system and economy more acutely
vulnerable to a spike in yields. How could the sanguine consensus view on rates
be wrong?

First of all, it appears that global reflationary forces have reached critical
mass. China and Asia are bouncing back. Loose financial conditions throughout
the developing markets appear poised to spur robust economic recovery. Two
important unknowns are how quickly inflationary pressures will reemerge and
how soon foreign central bankers will begin feeling the heat. All eyes on China.

I am struck by a market disconnect. Each passing year finds market and economic
forces increasingly globalized. Yet the view regarding favorable prospects
for the U.S. fixed income market seems to be driven by favorable expectations
of U.S. inflation and U.S. monetary policy. For the markets, Bernanke trumps
international forces. The dollar hardly matters. And globally, the view seems
to be that low U.S. market yields will continue to anchor global yields. But
with financial and economic power having shifted markedly overseas, will there
come a point in time when global factors play a much more significant role
in determining our market yields. Has the Fed commenced a game of tug-of-war?

Listening to Chairman Bernanke this week, I couldn't help but contemplate
the prospect of waning Federal Reserve power. And I am not referring to regulatory
power over our financial institutions. As I see it, the Fed is now locked into
permanent monetary ease; they've let another Bubble get away from them. Resulting
dollar devaluation traps the U.S. economy into a more inflationary backdrop.
Meanwhile, the dynamic of massive flows of outbound dollar liquidity, coupled
with unconstrained developing-economy Credit systems create powerful inflationary
dynamics globally.

It would make sense to me that global forces increasingly tug U.S. yields
upward. And we'll have to wait and see how much the Fed is willing to use its
balance sheet to try to tug them back down. Bernanke would clearly prefer to
talk rates lower. It will be interesting to see how long talk suffices.